The much-anticipated rule change expands the definition of “investment advice” to advice given to consumers and sponsors of retirement plans governed by Erisa.
By Cyril Tuohy |April 23, 2024
The U.S. Department of Labor has released the final version of a new set of rules governing investment advice to consumers and employer-sponsored retirement plans.
The Labor Department’s fiduciary rule is known as the “Retirement Security Rule: Definition of an Investment Advice Fiduciary.” Initial requirements will come into force Sept. 23, while other exemptions and reporting needs kick in September 2025, Plan Adviser reported.
The rule amends the definition of “investment advice” to require that advice given to consumers and retirement plans governed by the federal Employee Retirement Income Security Act (Erisa) must be in the best interest of those plans and participants.
“The definition of an investment advice fiduciary has not kept up with this changed marketplace, leaving too many retirement investors at risk for imprudent or disloyal advice,” said Lisa Gomez, assistant secretary of the DOL’s Employee Benefits Security Administration.
“The new rule and exemptions close the loopholes that defeat legitimate investor expectations by holding trusted advisers to a fiduciary standard,” a DOL fact sheet about the final rule states. “When an individualized recommendation comes from an investment professional holding themselves out as someone who is acting in the investor’s best interest, it is only right that the advice meet a fiduciary standard.”
Labor unions and consumer advocates have generally praised the rule as a way to protect consumers and workers from conflicts of interest and poor investment recommendations.
The Labor Department has received tens of thousands of comments on the rule supporting and opposing the sweeping rule change, which runs nearly 500 pages.
Industry groups from the American Council of Life Insurers to the National Association of Insurance and Financial Advisors and the Insured Retirement Institute have fought back against the new rule, arguing that it would constrain consumer access to investment choices.
“It will make it harder for Americans to access financial advice, it will make it harder to bring new professionals into the business, dramatically raise costs for the profession, and make millions of people less financially secure,” said Marc Cadin, CEO of Finseca, an advisory advocacy organization, in a statement.
“Instead of advancing this unnecessary and redundant rule today, DOL should have withdrawn it,” added IRI CEO Wayne Chopus, in a statement. From the start the rule has been hobbled by flawed rulemaking, he said, and “defies applicable judicial precedent.”
A previous — and largely similar — version of the rule issued by the Obama Administration was vacated by the courts in 2018, and Gomez has said that the department expects a new round of legal challenges to the rule once it is posted in the Federal Register on April 25.
The need to protect consumers saving through employer-sponsored retirement plans like 401(k)s and other employee benefit plans has gained new impetus as the Secure Act has expanded the number of new retirement plans, particularly those offered by small businesses. Congress passed the Secure Act in 2019 and then a companion version in 2022 known as Secure 2.0.
Proponents maintain the Labor Department rule is necessary to plug regulatory gaps in plan-level advice that aren’t covered by the Securities and Exchange Commission’s best interest regulation.
While larger plan sponsors have access to expertise and support of professional retirement plan advisors, advisors to small employers aren’t required to provide investment advice protection under Erisa.